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Daily Current Affairs – 7th March, 2016

Budget 2016 fails to lay out a clear roadmap for the petroleum industry

Energy has been an important part of the present Prime Minister’s agenda.

However the 2016 budget lacked clarity on certain principles affecting the petroleum industry because of which the stock prices of oil companies fell (ONGC stock prices fell by around 10%).

Fundamental outlook:

Three fundamental questions that arises at the backdrop of the announcement of budget 2016 wrt the petroleum industry are

Does the government appreciate the severity of the crisis facing the petroleum industry?

Is it serious about reviving domestic oil and gas exploration.

Is its emphasis on clean energy substantive?

A critical evaluation of the Policy announcements in the budget 2016:

The Finance Minister(FM) made three policy announcements

The first was that the price of gas from newly discovered fields would be determined through the market and linked to the price of alternative fuels.

It was not clear, at least initially, whether “newly discovered” meant discoveries yet to be made or those already made but not monetised.

It was also not clear whether the price would be linked to low-priced coal, the higher-priced imported liquefied natural gas or to a fuel between these two price points.

The second was to switch the calculation of cess on oil production from a specific rate (fixed rupees per barrel produced) to ad valorem (percentage of value).

This is what the companies had lobbied for and it was a sensible move.

The fixed charge of $9.1 per barrel produced was affordable when prices were hovering around $100 per barrel but a crushing burden in the current low price regime of around $35 per barrel.

What took the wind out of this proposal was the ad valorem rate of 20 per cent.

For, at that rate, the tax burden came down by only $2 per barrel from $9 to $7 and for so long as the price of oil remained in the current range.

In the event prices rise to the average level predicted by analysts of $45 per barrel in 2016, this benefit will be wiped out and companies will find themselves in the same financial straits they are in today.

The third one was to double the cess on coal production from Rs 200 to Rs 400 per tonne, and to direct that this money be used for financing clean energy.

Again, like the switch to ad valorem, this was a positive.

However there was a lingering concern, that this money would be diverted for other purposes.

So far, the clean energy fund has been managed by the finance ministry.

The money has not always gone towards clean energy research but for financing unrelated activities like cleaning the Ganges.

This concern might have been allayed somewhat had the FM assured listeners that the money would be managed by people with domain expertise and not subject to political or financial exigency.

Hard truths that the government should digest:

The government must internalise three hard truths:

India’s dependence on oil and gas imports will increase in the short to medium term.

We currently import around 75 per cent of our requirements.

This will go up to near 90 per cent by the end of this decade.

We are and will remain hugely vulnerable to the vicissitudes of the international market.

The petroleum industry is in terrible shape.

According to consultants Wood Mackenzie, every private oil company loses cash at $30 per barrel.

All are now on a massive cost-cutting exercise.

They estimate that over the period 2015-2017, the companies will take out $200 billion of expenditure and that exploration investment will drop from around $95 billion in 2015 to less than $40 billion in 2016.

Cost-cutting will not save the highly leveraged companies from bankruptcy and there will be a plethora of stranded assets available for sale at a discount.

Our environment is under stress.

Our cities are amongst the most polluted in the world, our forest cover is denuding; the water tables are receding — the list is long.

Clean energy is the sine qua non for breaking the currently unhealthy linkage between growth, energy demand and environmental degradation.

These three hard truths present the government with three clear choices.

If it wishes to accelerate exploration, it will have to stop milking the ONGC cow.

Private investors will not step into the breach.

A downward recalibration of the ad valorem tax rate would be a positive first step.

If it wishes to increase domestic production, it should do what many oil-producing countries, including China, the US, the UK and Malaysia, have done in response to the current low oil price regime and offer tax credits and exemptions for incremental production from marginal fields and enhanced oil recovery.

If it wishes to give a fillip to clean energy, it should put together a more robust package of subsidies and concessions, promote electric vehicles and cement R&D partnerships between government entities, private corporations, universities and research laboratories.

Connecting the dots:

Critically examine the problems faced by petroleum industry in India along with measures taken by the government to overcome them.

What do you understand by clean energy? Explain various sources of clean energy in India along with measures taken by the government to promote them.

Recently there was a suggestion that fiscal expansion or contraction should be aligned with credit contraction or expansion respectively, in the economy indicating a paradigm shift in how to determine fiscal deficit.

Idea is to recognize the possibility of an inverse correlation between fiscal deficit (fiscal expansion) and bank credit (monetary expansion) i.e If credit growth falls, fiscal deficit may need to rise and if credit rises, fiscal deficit ought to fall — to ensure adequate money supply to the economy.

As the FRBM Act ignores the possible inverse link between monetary and fiscal economies, time is ripe for an objective basis for fiscal deficit and to recheck FRBM act to review the Act, and if necessary, amend it significantly.